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This month unfortunately produced another negative result; –0.77%, bringing YTD back to 0.69% which was again disappointing. Continued slowing in acquisitions has reduced our ability to jumpstart returns by deep discount purchases, but we would rather pass than sacrifice quality. It is interesting to note that it was a particularly bad month for real estate as a sector however and against the benchmark returns we remain very strong. We are over 30% ahead of our benchmark S&P REIT Composite YTD, and continued upsets in the equity markets pull us over 20% ahead of our old benchmark (S&P 500) YTD.
The Fed’s takeover of Fannie and Freddie at the beginning of the month may well have boosted the stock market but it did little for the ailing mortgage giants which plunged 90% and 83% on consecutive days and at least the bondholders were protected by the move. It may be a “band aid” for now but this is not going to help long term. Many investors commenting on the impact to the sector describe Fannie and Freddie not as dominating the market but effectively as the market itself. Clearly if that is the case and it is well made, it was not so much that they were too big to fail but more realistically that they were too big to liquidate! Selling off a portfolio of that size would have had a far greater reaching impact on the world’s banks effectively smashing an enormous hole in their respective capital and giving rise to a credit crunch the likes of which has never been seen. There was really little choice to be made. The next few months will be telling but the explicit support from the Fed should give some much needed stability to the mortgage and bond markets.
The impact on defaulted loans and the sales of such packages has now become a hot topic once again. Whilst these REO packages can offer phenomenal opportunities for investors, the degree of willingness of the banks to continue trading these packages will be led by what they believe they can get from the Fed should it decide to further underwrite the market. There may also be support at a banking level to prevent further collapses and if this is so, we may well be entering a limbo area until at least the presidential election is over with in November. We have already seen banking shares rise in value as a result of the move and the financial sector as a whole has benefitted from the move. Real Estate as a sector rose to second place as a result of the move and overall in the short term this is likely to help. Then came Lehman Bros.
With rising problems in its real estate portfolio the bank was seeking acquisition, merger or all out rescue as by the middle of the month its shares were in freefall! On the 15th September, Lehman filed for Chapter 11 Bankruptcy protection, the largest such filing in US history and the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years ago. It was time for more drastic action and the Fed at the time of writing is focused on a proposed “Bailout Plan” for the entire industry. Whilst we await finalization of the plan, rest assured, we will continue to monitor new opportunities that this may bring for the Fund.
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